Time-Barred Debts: Statute of Limitations

When you take on a credit obligation, or liability, you normally sign an agreement or promissory note requiring pay back of the debt. What you’ve just done is incurred what’s referred to as “contract debt.” If you default on a contract debt, such as a credit card, the creditor can and likely will vigorously pursue you for payment.

In many cases the original creditor will eventually sell your debt to a third party debt buyer. The debt buyer now becomes your creditor and you no longer owe the money to the original creditor. At this point the new creditor can report the account to your credit reports and enlist the assistance of a collection agency to persuade you to make good on your promise to pay the debt.

Collection agencies normally collect debts using a variety of tactics. The agency will definitely report the debt to your credit reports. The agency will call you and write to you demanding that you make a payment. And, in the worst-case scenario for the debtor, the collection agency can sue you to collect the debt.

If you’ve been contacted by a collection agency about an old unpaid debt, it’s important that you do your due diligence and verify that the debt is valid and whether or not the collector still has the right to collect – especially if the debt has passed the statute of limitations.

The statute of limitations (SOL) to collect a debt is the length of time a creditor or collector has to take legal action and file a lawsuit against you in order to collect. If the statute of limitations has expired, the creditor or collector has no legal recourse and no longer has the ability to sue you for payment. The debt essentially becomes what’s called “time-barred,” which means the court no longer has the right to force you to pay up.

The SOL on time-barred debt varies depending on individual state laws, the type of debt and the type of contract initially agreed upon for the debt. For example, if you default on a contractual debt in the state of California, the statute of limitations is four years — meaning you can’t be sued for collection after four years has passed.

Statute of limitations by state

It’s important note that the state you resided in when you incurred the debt could take precedence over your current residence if you’ve moved to a different state. In most cases, the statute of limitations in the state where the contract was initially executed will rule unless the contract specifically states otherwise.

For example, if you signed a written contract with a creditor in California and later moved to Kentucky, the statute of limitations would be based on California law unless otherwise stated. In this example, California law only allows you to be sued for four years, where Kentucky’s is quite bit longer at 15 years. Here’s a breakdown by state for the statute of limitations on written contract debts:

SOL: Credit reporting vs. debt collection

Don’t assume that the just because the statute of limitations to sue for a collection has passed that the account won’t be reported in your credit reports. The statute of limitations for collecting an unpaid debt and how long a creditor can legally report that debt in your credit report are very different. The statute of limitations for reporting a collection is 7 years, regardless of the state you live in. As evidenced in the preceding list the statute of limitations for collecting a debt can vary widely — from as little as 3 years to as long as 15 years for states like Kentucky and Ohio.

Unpaid collections: To pay or not to pay

One of the most common questions I get about collections is whether or not it makes sense to pay the debt, especially in regards to time-barred debts that have passed the statute of limitations.

When it comes to unpaid debts, I’d argue that you should pay the debt, especially if the debt is legitimately yours and you owe it. Keep in mind that collections will remain in your credit reports for 7 years, regardless of whether or not the statute of limitations has expired and the creditor or collector is legally able to sue you.

It’s also important to keep in mind that some lenders may require that you pay or settle old unpaid collections before they’ll agree to do business with you. This is especially common in the mortgage industry and something to keep in mind if you’re planning to apply for a mortgage to purchase a home.

Do collectors really sue if I don’t pay?

The collection industry is a big business and the odds of being sued for an unpaid debt is pretty high, so the answer is “yes.”

Obviously, the more you owe, the higher the risk of being sued. If you have a collection and are able to pay or settle the debt for less, it’s in your best interest to do so. It’s no secret that collection agencies are aggressive, and if the number of FDCPA and FCRA lawsuits are any indication, collectors are suing now more than ever to get their money.

John Ulzheimer is a recognized expert on credit reporting, credit scoring and identity theft, and is the Senior Columnist at Credit Card Insider. He is twice Fair Credit Reporting Act (FCRA) certified by the credit reporting industry's trade association and has been an expert witness in over 100 cases involving credit issues. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. View all articles by John Ulzheimer.

I assume the chances of being sued for a debt depends on the amount of the debt. I doubt debt collectors will go to court over $50. Its not worth the time and effort for a smaller amount. But if you owe a larger amount then I expect its a lot more likely they’ll go to court for it.

I actually don’t personally know anyone who’s had a debt go to court. Course I can’t say thats something people would necessarily tell me. People don’t tend to be very open about it if they’re having debt problems. Everything will seem fine till you see the foreclosure sale sign go up in their lawn or their car towed off.

Steve, that’s a very good point. Thanks for pointing that out. And you’re 100% correct that debts can be re-aged when debtors do something ill advised like make a payment on a debt that has already “expired.” That resets the clock. Some collectors will ask the consumer to make a “good will” payment for that very reason. The bottom line is if you want to pay your debt after it has become time barred, fine….but, you better settle or pay it in full or you might find yourself on the wrong side of a collection lawsuit.

A final note: making a payment does not reset the clock for credit reporting. NOTHING, repeat…NOTHING you do can cause the collection to remain on a credit report longer than the 7 years allowed by Federal law. Any attempts to cause a collection to remain longer is illegal and a violation of the FDCPA and FCRA.

That is incorrect if you make a partial payment on the balance it resets the clock of SOL. The SOL is calculated from last date of activity on the account. If you are beyond SOL making a payment or even acknowledging to the collector that the debt is valid can reset the statutes of the debit

Steve is correct. Many collection agencies specialize in collecting time-barred debt. They can acquire the debt on the cheap (pennies on the dollar) because of the legal remedy expiration. Then they work to induce the debtor to do something that “re-sets” the clock on the statute of limitations back to zero. For example, in some states if the debtor makes a partial payment on a debt or otherwise acknowledges that he or she owes a debt that they haven’t been paying, the statute of limitations clock is re-set to zero. This is a bonanza for the collection agency: Now it can sue for collection.

I was under the impression that there are a few states where it is prohibited for a consumer to even by contacted by a collection agency regarding a time barred debt… yet it says nothing about that here. Do you know which states prohibit any contact regarding time barred debts?

A demand letter is just that – a demand – that happens to be written up in scary legalese by a lawyer. However, a civil *judgment* (i.e. it went to court, and the court ordered you to pay) is quite another matter. If you receive a demand letter, read it very carefully to see whether it’s a demand reminding you of the debt and threatening to sue. A demand letter is the first step in the legal process leading up to a law suit – but if the statue of limitations has expired, it’s an empty threat. However, if you’ve already been sued and lost and had a judgment recorded against you, and the demand letter is reminding you of that fact, you have NO legal recourse left and must repay the debt.

I have a diet from when I had a heart attack that I have been unable to pay as I remain unemployed. My statute of limitations ends in April, yet I received a call today that they are taking me to court. Suggestions?

I have a 2nd mortgage that is 72 months behind? I live in Colorado so this note should be Time Barred? Are there any Attorneys that work on this in Colorado so I can get this removed? or what can or should I do?

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About Luke Landes

Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke has contributed to PC World Magazine, US News, Forbes, and other publications. Read more about Luke and about Consumerism Commentary.

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